New research suggests that nearly 75 percent of homeowners were underinsured immediately after the Marshall Fire

ONE research paper published this month estimates that underinsured homeowners affected by the Marshall Fire were less likely to file for rebuilding permits and more likely to sell their damaged properties after the disaster.

Underinsurance or lack of coverage to fully rebuild a home after disasters is a common problem. However, most homeowners believe they have enough coverage to rebuild after disasters, according to one Home insurance survey 2020.

The paper analyzed coverage amounts, state insurance data and permits from 24 insurers and nearly 5,000 policyholders who filed claims after the fire.

The paper estimated that 74 percent of policyholders affected by the Marshall Fire were underinsured and 36 percent were severely underinsured, meaning their coverage would cover less than three-quarters of the cost of rebuilding.

“If you look at a market where it costs a million to rebuild, that’s about a quarter of a million that people have to come up with through other sources,” said Tony Cookson, a CU Boulder business school professor and co-author of the paper.

“Most households can’t do that,” he said.

Underinsurance can begin to unravel a community as it tries to recover from a disaster, according to the paper.

“The concern for communities about underinsurance is that you want people to rebuild. You want the community to exist,” said Philip Mulder, a professor and co-author at the University of Wisconsin-Madison. “The concern is that people might not be able to do so without adequate insurance.”

Underinsurance reduced the number of rebuilding permits filed in Boulder County within a year of the fire by 25 percent and was a contributing factor in more than 50 percent of destroyed home sales 18 months after the fire, according to newspaper estimates.

“That tells us two things: you’re going to have these vacant lots sitting around longer, and you’re also going to have more turnover in the housing market,” Mulder said.

Some policyholders had been uninsured for decades, beginning when they purchased coverage and continuing even as insurers update coverage limits over time.

A homeowner’s wealth, a policy’s age, increases in rebuilding costs during covid, and whether homeowners periodically increased their coverage did not fully explain underinsurance.

Instead, a policyholder’s insurance company is “the most important predictor” of whether they are underinsured, according to the paper.

The research suggests that insurers with more policies in the area and those who have written coverage for a longer period of time tend to better estimate rebuilding costs.

For consumers, the paper’s authors suggest homeowners can shop for the lowest possible “headline” premium when comparing insurance quotes. But a cheaper premium may not always provide enough coverage to rebuild one’s home.

“People are not professional builders,” Mulder said. “People don’t realize that suggested coverage limits vary widely across insurers and that it’s actually not enough to rebuild their home.”

The paper coines a new term called “coverage neglect” to describe how this happens. Homeowners are sensitive to the price of a premium, but they may not realize that they are comparing different levels of coverage.

Cookson, who fled the fire with her family, took out her own home insurance afterwards and found it difficult to comparison shop.

“The number the insurance company quotes me doesn’t give me full insurance — that realization isn’t very natural for most households to have,” Cookson said.

Insurers and builders often estimate rebuilding costs using software called RSMeans, which some consumer advocates say can underestimate the true replacement cost of a home if not combined with a detailed home inspection.

Mulder and Cookson said better tools to help consumers shop could help ease underinsurance.

“Maybe we need to provide more information that allows (homeowners) to make choices in a way that’s in their best interest,” Cookson said. “When you shop now, it doesn’t matter how you compare two different policies that offer different coverage.”

The research builds on a preliminary analysis released by state insurance regulators in 2022 that found about two-thirds of the homes destroyed in the fire were underinsured.

That year, state legislators raised homeowners’ coverage levels, and in 2023 passed legislation requiring insurance regulators to detail rebuilding costs in an annual report. The first report is scheduled to be published in April 2025.

“It’s a troubling reality that most homeowners are underinsured and only adds to the pain when tragedy strikes,” said state Sen. Dylan Roberts, D-Frisco, who sponsored the underinsured reporting bill.

“We still have more to do to ensure that insurance is accessible and affordable,” he said.